23 Things They Don't Tell You About Capitalism

The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers who were responsible for their institution’s failure were punished. Yes, a small number of CEOs have lost their jobs, but few of those who have remained in their jobs have taken a serious pay cut and there has been an enormous, and effective, resistance to the attempt by the US Congress to put a cap on pay of the managers of financial firms receiving taxpayers’ money. The British government refused to do anything about the £15–20 million pensions payout (which gives him around £700,000 yearly income) to the disgraced former boss of the RBS (Royal Bank of Scotland), Sir Fred Goodwin, although the intense negative publicity forced him subsequently to return £4 million. The fact that the British and the American taxpayers, who have become the shareholders of the bailed-out financial institutions, cannot even punish their now-employees for poor performance and force them to accept a more efficient compensation scheme shows the extent of power that the managerial class now possesses in these countries.

Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them. Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers have to be constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay (for more on this, see Thing 2). Having to maximize dividends to keep the shareholders quiet, investment is minimized, weakening the company’s long-term productive capabilities. When combined with excessive managerial pay, this puts the American and British firms at a disadvantage in international competition, eventually costing the workers their jobs. Finally, when things go wrong on a large scale, as in the 2008 financial crisis, taxpayers are forced to bail out the failed companies, while the managers who created the failure get off almost scot-free.

When the managerial classes in the US and, to a lesser extent Britain, possess such economic, political and ideological power that they can manipulate the market and pass on the negative consequences of their actions to other people, it is an illusion to think that executive pay is something whose optimal levels and structures are going to be, and should be, determined by the market.

Thing 15 People in poor countries are more entrepreneurial than people in rich countries

What they tell you

Entrepreneurship is at the heart of economic dynamism. Unless there are entrepreneurs who seek out new money-making opportunities by generating new products and meeting unmet demands, the economy cannot develop. Indeed, one of the reasons behind the lack of economic dynamism in a range of countries, from France to all those states in the developing world, is the lack of entrepreneurship. Unless all those people who aimlessly loiter around in poor countries change their attitudes and actively seek out profit-making opportunities, their countries are not going to develop.

What they don’t tell you

People who live in poor countries have to be very entrepreneurial even just to survive. For every loiterer in a developing country, you have two or three children shining shoes and four or five people hawking things. What makes the poor countries poor is not the absence of entrepreneurial energy at the personal level, but the absence of productive technologies and developed social organizations, especially modern firms. The increasingly apparent problems with microcredit – very small loans given to poor people in developing countries with the pronounced aim of helping them set up businesses – shows the limitations of individual entrepreneurship. Especially in the last century, entrepreneurship has become a collective activity, so the poverty of collective organization has become an even bigger obstacle to economic development rather than the deficient entrepreneurial spirits of individuals.

The problem with the French…